Bear-Market Risk Rises With Consumer Prices Outpacing GDP Growth

NEW YORK (Sept 14)  The chances of a longer-term bear market in stocks rose Tuesday as the August consumer price index came in higher than expected and showed inflation continuing to outpace US economic growth.

Investors were rattled by the data, putting the S&P 500 Index down 3.2% and on pace for its biggest drop since late August. The reason is clear, as the inflation data will likely keep the Federal Reserve on pace for a third-straight 75 basis-point interest-rate hike and potentially open the door for more aggressive tightening down the road.

Read: Stocks Are On a Roll; Inflation Data Determine If It Continues

Historically, US equity bull markets are marked by periods where the real economy grows faster than inflation, the opposite of what’s happening right now. Consensus estimates suggest US consumer prices are likely to run hotter than the gross domestic product through at least the first half of 2023, according to Bloomberg Intelligence. This is sparking fears that the summer’s stock market gains could be just a counter-trend rally.

“Major bear markets of the past half-century were accompanied by inflation outpacing growth, such as the rapid jump in prices in the 1970s and a period of scant expansion and steady disinflation in the early 2000s,” BI equity strategists Gina Martin Adams and Michael Casper wrote in a research note.

Although inflation gathered momentum in the latter half of the 1960s, it didn’t exceed growth until the end of the decade, in-line with a peak in stocks in 1968, according to Martin Adams and Casper.

That said, early signs of peak inflation are starting to emerge. For example, US gasoline prices have fallen for 13 weeks in a row, while Corporate America sees a relatively stable economic and inflation outlook despite investors’ recession fears.